Which of the following relationships is true regarding the costs of issuing the

Question

Which of the following relationships is true regarding the costs of issuing the following securities? A) Common stock > preferred stock > bonds B) Preferred stock > common stock > bonds C) Common stock > bonds > preferred stock D) Bonds > common stock > preferred stock

Explanation / Answer

Answer: d. Common stock > preferred stock > bond Explanation: According to much corroborated research, riskier securities involvehigher gross spreads and costs more for the issuing company.Essentially, the listing above is in order of the security'sriskiness. For example, convertible preferred stocks (preferredstocks that can be converted into common stock) entail higher grossspreads and other expenses than non-convertible preferred stocks.Additionally, because in the US dividends on preferred stock arenot tax deductible (in contrast to interest expense), the effectivecost of capital raised by preferred stock is 35% greater thanissuing the equivalent amount of debt at the same interestrate. Source: The Costs of Issuing Preferred Stock Mukesh Bajaj, Sumon C. Mazumdar, Atulya Sarin. "The Costs ofIssuing Preferred Stock." LECG, LLC University of California,Berkeley, Santa Clara University.

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